utdallas.edu/~metin 1 Planning Demand and Supply in a Supply Chain Forecasting and Aggregate Planning Chapter 8

utdallas.edu/~metin 2 Aggregate Planning (Ag-gregate: Past part. of Ad-gregare : Totaled) u If the actual is different than the plan, why bother sweating over detailed plans u Aggregate planning: General plan for our frequency decomposition –Combined products = aggregate product »Short and long sleeve shirts = shirt u Single product »AC and Heating unit pipes = pipes at Lennox Iowa plant –Pooled capacities = aggregated capacity »Dedicated machine and general machine = machine u Single capacity –E.g. SOM has 100 instructors –Time periods = time buckets »Consider all the demand and production of a given month together u When does the demand or production take place in a time bucket? u Increase the number of time buckets; decrease the bucket length.

utdallas.edu/~metin 3 Fundamental tradeoffs in Aggregate Planning Capacity: Regular time, Over time, Subcontract? Inventory: Backlog / lost sales, combination: Customer patience? Basic Strategies u Chase (the demand) strategy; produce at the instantaneous demand rate –fast food restaurants u Level strategy; produce at the rate of long run average demand –swim wear u Time flexibility; high levels of workforce or capacity –machining shops, army u Deliver late strategy –spare parts for your Jaguar

utdallas.edu/~metin 4 Matching the Demand Use inventory Use delivery time Use capacity Demand Adjust the capacity to match the demand Demand - Which is which? Level Deliver late Chase Time flexibility

utdallas.edu/~metin 5 Capacity Demand Matching Inventory/Capacity tradeoff u Level strategy: Leveling capacity forces inventory to build up in anticipation of seasonal variation in demand u Chase strategy: Carrying low levels of inventory requires capacity to vary with seasonal variation in demand or enough capacity to cover peak demand during season

utdallas.edu/~metin 6 Case Study: Aggregate planning at Red Tomato u Farm tools: u Shovels u Spades u Forks Aggregate by similar characteristics Generic tool, call it Shovel Same characteristics?

utdallas.edu/~metin 7 Aggregate Planning at Red Tomato Tools

utdallas.edu/~metin 8 Aggregate Planning What is the cost of production per tool? That is materials plus labor. Overtime production is more expensive than subcontracting. What is the saving achieved by producing a tool in house rather than subcontracting?

utdallas.edu/~metin 9 1. Aggregate Planning (Decision Variables) W t = Number of employees in month t, t = 1,..., 6 H t = Number of employees hired at the beginning of month t, t = 1,..., 6 L t = Number of employees laid off at the beginning of month t, t = 1,..., 6 P t = Production in units of shovels in month t, t = 1,..., 6 I t = Inventory at the end of month t, t = 1,..., 6 S t = Number of units backordered at the end of month t, t = 1,..., 6 C t = Number of units subcontracted for month t, t = 1,..., 6 O t = Number of overtime hours worked in month t, t = 1,..., 6 Did we aggregate production capacity?

utdallas.edu/~metin Objective Function: 3. Constraints u Workforce size for each month is based on hiring and layoffs u Production (in hours) for each month cannot exceed capacity (in hours)

utdallas.edu/~metin Constraints u Inventory balance for each month Period t Period t+1 Period t-1

utdallas.edu/~metin Constraints u Overtime for each month

utdallas.edu/~metin 13 Execution u Solve the formulation, see Table 8.3 –Total cost=$ K, total revenue=$640K u Apply the first month of the plan u Delay applying the remaining part of the plan until the next month u Rerun the model with new data next month u This is called rolling horizon execution

utdallas.edu/~metin 14 Aggregate Planning at Red Tomato Tools This solution was for the following demand numbers: What if demand fluctuates more?

utdallas.edu/~metin 15 Increased Demand Fluctuation Total costs=$ K units of total production as before why extra cost? With respect to $ K of before.

utdallas.edu/~metin 16 Summary u Qualitative strategies of matching demand and supply u Quantitative methods

utdallas.edu/~metin 17 Material Requirements Planning u Master Production Schedule (MPS) u Bill of Materials (BOM) u MRP explosion u Advantages –Disciplined database –Component commonality u Shortcomings –Rigid lead times –No capacity consideration

utdallas.edu/~metin 18 Optimized Production Technology u Focus on bottleneck resources to simplify planning u Product mix defines the bottleneck(s) ? u Provide plenty of non-bottleneck resources. u Shifting bottlenecks

utdallas.edu/~metin 19 Just in Time production u Focus on timing u Advocates pull system, use Kanban u Design improvements encouraged u Lower inventories / set up time / cycle time u Quality improvements u Supplier relations, fewer closer suppliers, Toyota city u JIT philosophically different than OPT or MRP, it is not only a planning tool but a continuous improvement scheme